The debate which took place during the last European economy ministers meeting about digital enterprises taxation has not found a conclusion, despite the European Commission support. International context was definitely not favorable. Most of these companies being American, a decision carried the risk to look like a riposte to Donald Trump protectionist moves when Europe was negotiating an exemption for the duties on aluminum and steel. It was useless to give the impression to outbid and to increase tensions when financial markets are nervous and fear the launch of a real trade war which would have negative consequences on growth worldwide. The risen issue was not without purpose. The impossibility, for the states, to levy a fair taxation on the profits these companies make in Europe is just one more vicissitude of the fiscal challenge Europe is confronted with.
Before that, French and German leaders had agreed to reopen the case of the harmonization of enterprises taxation, a true sea serpent. For more than ten years, both inside European and OECD auspices, few progresses have been made in that area. This issue is especially bitter in the eurozone where very tough constraints have been put regarding deficit and public debts levels but where, in the same time, some states are doing an intense competition on taxation rules which is not without consequences on the financing of social protection and on fiscal receipts levied on business. This general feeling of impunity for someone along efforts imposed to others is not without impact on the rise of populism in many states and on the fall almost everywhere of the adhesion to the European project.
Corporate tax harmonization is the most difficult issue to solve for two reasons. First, it is very complex. Debate is frequently about its rate and its change, in one direction or in another. This presentation is easily understandable and receives media attention. That has been observed in the U.S. with the reform launched by Donald Trump. But the efficiency of the rates harmonization, the adoption of a single rate or a fork, like what it exists for VAT, will be very limited if, on the same time, there is no harmonization of the basis of this tax. But it is very difficult, even impossible due to the complexity of the definition of the basis in different countries. For instance, to read the dozens of pages in the French general tax code permits to realize the level of detail and the many exceptions contained in the definition of the basis which will be used to calculate the tax. It is easy to understand after that how it will be difficult for all the states to reach an agreement. Because, and it is the second reason of the failure of previous attempts in this area, as a direct tax, unanimity is required to approve harmonization. It is obvious that these which use taxation to attract business to the detriment of the others members of the Union, will have the tools to block any discussion. It will be the case of the two leaders in these practices, Ireland and Luxembourg. Yet, solutions do exist to bypass these obstacles and to advance.
Ireland became a welcome land for the major American and Japanese companies which located there subsidiaries whose only purpose was to pack or to realize the final fitting of goods before being sent to European Union. Pharmaceutical products exports reached 38 billion dollars in 2017 and electronic and measure equipments 23 billion. In order to pay as little taxes as possible, these companies send to the country components or parts carrying the lowest possible price and re-export the final product at the market price, locating margins where the taxes are the lowest. This manipulation through transfer prices are even sometimes accompanied, as it is the case regarding Apple which is the subject of a European inquiry, with an even more favorable special agreement. The issue is well known for a long time but the scope of the fiscal optimization is constantly growing. When it was necessary to save Irish banks during the euro crisis, its partners tried without success to convince Ireland to put an end to these practices through an increase of the corporate tax rate. Due to the risk of a crisis which could have become systemic, Brussels did not insist. A new opportunity is opening up with the Brexit. It is vital, for Dublin, to obtain special agreements allowing the transit through England toward European Union of the production of the companies located in its country. Europe must prove its firmness and demand, as a counterpart, that an end is put to the “Irish ballade” which generates every year fiscal receipts losses representing billion euros in other countries.
The Luxembourg case is easier to solve. The specialty of the country is the “mailbox” companies. Registered there, they have no other purpose than to receive royalties from their holdings and their subsidiaries, regarding trademarks, patents or even fictitious services. The companies located in other countries reduce, in doing so, the basis of their corporate tax. The benefits pay a very low taxation and are sent back to their holdings or even sometimes to fiscal heavens. The “mailbox” company, most of the time, employs no salaried. Its manager job consists in opening a bank account and in checking receipts before sending them back. All these operations are done with the highest transparency and the activity of these companies is regularly published in Legilux, the official government gazette, which can be consulted by anybody on its Internet site. The weak point of this system is in the status of the manager. As he has no real activity, he can accept dozens or even a hundred of mandates, which confirms the fictitious character of the companies he manages. To put an end to these excesses it would be enough to issue a European directive which limits the number of mandates a manager or an institution can exercise, as it exists in France for the board members. In that domain, there is no need for unanimity. Once the directive adopted, the offices which offer these services to the mailbox companies and which are at the origin of these practices, will have, to respect the directive, to recruit thousands of managers, which will not be easy and which will generate new costs and public attention. That will attract media interest and the name of the companies which use mailbox subsidiaries will be known by the public. That will affect their reputation and incite them to reduce these practices and even to put an end to them.
Europe cannot, in the same time impose tough budget rules and be lax on fiscal issues. Regarding business, enterprises cannot pretend to take all the advantages of the free circulation of goods and persons and permanently trying to find all the ways to exempt themselves from their duties in taking advantage of the rules or of the lack of European rules. The European project is facing a trust crisis. It results from institutional mechanisms and from some national behaviors. It is the duty to everyone to take its responsibilities because those which have been the major beneficiaries will be the first to be affected if the project falls in a heavy crisis.